If you missed the filing deadline to elect portability and increase your federal gift and estate tax exclusion, there's still time. A recent Internal Revenue Services (“IRS”) Revenue Procedure, Rev. Proc. 2017-34, provides a simplified, less expensive way to get an extension, make the election and reap substantial tax savings.
This revenue procedure automatically extended the deadline for executors to elect portability until January 2, 2018 or two years from the date of death, whichever is later. Portability allows you to use your predeceased spouse’s unused federal estate and gift tax exclusion amount. Currently, the federal estate and gift tax exclusion in 2017 is $5,490,000 per person, which means you could potentially end up with a $10,980,000 estate and gift tax exclusion. Read on to learn how to take advantage of this recent extension and potentially pay significantly less estate tax.
Typically, in order to qualify for this election, you (or specifically, the executor) must have filed your spouse’s federal estate tax return within the required deadline —9 months from the date of death— even if a return was not otherwise required. Prior to this new IRS Revenue Procedure, if you missed the filing deadline for any reason, you would have endured an expensive letter ruling process with the IRS to request an extension. The new procedure eliminated this letter ruling process and automatically extended the filing deadline to make the election on or before the later of 1) the second anniversary of the deceased’s death or 2) January 2, 2018.
This is good news if you never filed and are now reconsidering. However, in order to take advantage of this extension, the following requirements issued by the IRS in the Revenue Procedure must be met:
1. The decedent has a surviving spouse;
2. The decedent died after December 31, 2010;
3. The decedent was a U.S. citizen or resident;
4. The estate was not otherwise required to file a federal estate tax return;
5. The estate did not, in fact, file a timely return.
Why You Should Consider Filing a Federal Estate Tax Return
It’s possible that you never filed a federal estate tax return for your spouse because your combined assets are well below your own exclusion amount. Perhaps you still think this is the case, so why bother? There are many variables that go into estate tax:
• Situations can change;
• Estate tax laws could change or exclusion amounts could decrease;
• Your estate could grow faster than expected;
• You could inherit property, win a lawsuit or win the lottery; or
• Perhaps you are not considering all assets that are includable in your taxable estate, such as prior taxable gifts, life insurance proceeds, retirement plans or the value of residences or collectibles.
If your estate exceeds the federal estate tax exemption in effect at the time of your death, making this election could potentially save you up to 40% of your spouse’s unused exclusion amount. So it may be well worth it.
There are many factors that determine whether you should file a return and make this election. For guidance on whether you may benefit from the recent portability extension, please call Scott Testa or your Friedman LLP tax professional as soon as possible to do a proper analysis and, if needed, file a return before January 2, 2018 or two years after death.